Here's how Amazon is building its competitive advantage.
Correction: Appended, Nov. 6.
On the outskirts of almost every major city in America, Amazon.com AMAZON.COM INC. AMZN 1.2947% is building massive but inconspicuous warehouses designed to dispatch goods in an increasingly real-time fashion.
The strategy is expensive, consuming billions of dollars in capital expenditures every year, but its audacious scale and execution could consolidate Amazon’s still-incipient stranglehold over the biggest retail market in the world.
The transformation of Amazon
It’s important for investors to appreciate that the Amazon of today is nothing like the Amazon of five years ago.
In 2009, it operated 18 fulfillment centers in a smattering of second-tier states such as Washington, Indiana, Kentucky, Kansas, and Delaware. Today, more than 60 of these mammoth facilities are scattered across the country in proximity to the nation’s major population centers.
The expansion gives Amazon physical beachheads from which it can capture a growing share of retail sales on a city-by-city basis. Perhaps most importantly, it chips away at one of the principal deterrents to online shopping: immediacy.
Thanks to fulfillment centers built since 2012, Amazon offers same-day delivery to customers in 12 out of the 14 largest metropolitan areas, including New York City, Los Angeles, and Chicago. A full 31% of the American population can now order something from Amazon in the morning and get it delivered to their doorstep that evening.
“As we get closer and closer to customers with fulfillment, we have seen growth,” Chief Financial Officer Tom Szkutak said on a conference call last year.
The move also lays the groundwork for Amazon’s long-known desire to tap into the $600 billion-a-year grocery market, which is second only in size to the $650 billion market for general merchandise.
It’s initiated grocery delivery services in its hometown of Seattle as well as in San Francisco, Los Angeles, and New York City. And by its own admission, it is “branching out as fast as we can while being careful not to sacrifice the quality and convenience our customers expect.”
Finally, this burgeoning infrastructure will allow Amazon to capture share in the market for bulky, big-ticket items such as televisions, refrigerators, and laundry machines. In 2013, for instance, it opened facilities in Texas and Florida designed specifically to “pick, pack, and ship large items to customers, such as kayaks, televisions, and more.”
A land grab of unprecedented size
Taken together, the speed and scale at which Amazon is expanding its network of fulfillment centers represents a retail land grab unseen since Wal-Mart WAL-MART STORES INC. WMT 1.5309% exploded onto the scene in the second half of the 20th century. And the stakes this time around are even greater.
Whereas Wal-Mart disrupted mom-and-pop retailers and general merchandisers, Amazon’s ambitions are without limit. It wants to be the “everything store,” and it’s laying waste to large swaths of the existing retail landscape in its pursuit of that objective.
Moreover, whereas the vulnerabilities of Wal-Mart and other big-box retailers were exposed by the emergence of e-commerce, it’s hard to imagine another paradigm shift anytime soon that will further reduce costs while simultaneously increasing convenience.
In short, by laying siege to local marketplaces with fulfillment centers, it isn’t unreasonable to conclude that Amazon is in the process of erecting an impenetrable moat that could last for generations.